Deficit Hawks Should Curb Their Enthusiasm About Jobs

With our best job reports looking like Clinton's worst, now isn't the time to pivot to deficit reduction.

Steven Pearlstein is concerned there’s too much emphasis on getting unemployment down and not enough on pivoting to deficit reduction in the states. Krugman has a good response; I want to focus on two specific parts of Pearlstein’s post. The first:

There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more.

Let’s start with some basic facts: Monthly job growth was over 250,000 in just over half of the months during Bill Clinton’s presidency. In the other half, the slow months, the average job growth was around 154,000 per month.

Knowing that is what healthy job growth looks like, the meek jobs numbers we are seeing -- last month’s was 243,000, and the high end estimate for this month is 250,000-300,000 -- looks like it may be approaching a period of solid growth. But with so much potential downside (Iran, Europe, etc.), why would we want to stop expansionary monetary and fiscal stimulus?

Steven Pearlstein notes, “The data points for this optimism are to be found in recent reports on private payrolls (averaging just under 200,000 jobs per month for the past year).”

Notice the “private” payrolls -- total job growth is actually 160,000 averaged when you take into account the shedding of government jobs through 2011. Which is to say our economy at its strongest looks close to the Clinton economy at its weakest.

There is no denying that an official unemployment rate of 8.3 percent is too high and understates the weakness in the job market. But too much of their gloomy analysis is based on a misguided assumption that it’s possible to put the nation on a sustainable growth path without making the painful but necessary structural adjustments required to an economy left badly out of balance by the Bubble Economy…

It is the restructuring and right-sizing of the public sector that, as a practical political matter, only happens when the fiscal pressure is on. It can easily be phased in without throwing the economy into recession.

This “structural adjustments” part is frustrating because it isn’t clear what he is talking about (until you get to the second paragraph). Is the issue the idea that the capital markets think the debt is out of control? Workers can’t be retrained? Hysteresis? There are ways of quantifying each of these arguments and they have their strengths and weaknesses. An incredibly generous argument about structural unemployment would say that we might hit problems closer to 6 percent than 4 percent, and even then we are still far away.

The second paragraph is similar to Richard Fischer’s argument against QE (and Naomi Klein’s Shock Doctrine too) -- if growth takes off, we can’t make the hard decisions necessary for the economy. At 6 percent unemployment, crafting state budgets won’t be any easier -- better to do whatever is necessary now, while in a crisis.

I don’t agree with the idea that state budgets will be significantly easier to deal with at full employment in theory, but I also don’t see this working in practice. Is there any evidence that state governors who attack workers to fix the budgets aren’t turning around and cutting corporate taxes by a larger amount over the long run? That’s what is happening is Wisconsin. Shock times aren’t about responsibility -- they are about power shifts.